From time to time I write about personal wealth and investing. I was a financial advisor for 15+ years after all, so it's a part of who I am. Also, it's quite fascinating to me how the investment industry has evolved over the years and continues to evolve in the age of social media.
It bothers me greatly when I see articles like this from MarketRiders that attempt to convince consumers that they are stupid for working with a professional financial advisor. These guys have created an innovative distribution channel for selling their financial services and I applaud them for such, but I can't stand it when investment firms attempt to convince investors to use their products based on the premise that “you're stupid if you do otherwise.”
Consumers are smart. We don't give them enough credit.
I ask the following question: Which cost is greater – The cost of paying a financial advisor or the cost of a bad decision?
The best financial advisors realize that their job is to save the client from himself. You see, there is something called the behavior gap that explains the difference between the returns achieved by the S&P 500 over time and the returns not achieved by the average investor.
Why does the average investor consistently underperform the S&P?
Here is MarketRider's reasoning for the difference in returns:
Possibly the cause is rooted in the astute advertisements run during the Masters, British Open, U.S. Open, and beyond that get your investment account open and your mind closed. Critical thinking skills can be whisked away by multi-million dollar marketing campaigns targeted to cast their spell. Once an investor buys the commercial rhetoric, a hypnotic trust can hijack critical thought. The hypnotizer can get the otherwise astute subject to perform the most ridiculous behavior, such as paying someone to take his money.
Is allowing someone to manage our wealth and paying them to keep us on the right track ridiculous behavior? Or is it ridiculous behavior not to work with an advisor to help guide and support us toward our financial objectives? What about my personal trainer who helps me stay in top physical condition? What about my business advisor who helps me make good decisions about my company?
A Story of Ridiculous (and costly) Behavior
One of my wealthiest and most successful clients in past years once had an opportunity to lock in a significant gain on a concentrated position. It kept me up at night thinking about this inherent risk he was taking on as he had recently taken an early retirement package from a large corporation (back when these packages were still offered).
He refused to sell AND he refused to protect his position. Why? Because he did not want to pay the associated fees, which by the way were very reasonable, and probably would not have even made a car payment for me at the time. Several months later, this concentrated stock he owned plummeted and lost 90% of it's value. The entire way down he refused to sell because he thought “well, it will come back…I know this company and they've been good to me”. It never came back.
What might have cost the client several hundred dollars to protect a six figure position ended up costing him the six figure position…a good chunk of his retirement assets.
What was the culprit here? HUMAN EMOTION. THE BEHAVIOR GAP.
Want to learn more about how to become a better investor? (and it's got nothing to do with fees) Go and spend some time on my friend Carl Richard's site “The Behavior Gap” and stop reading the garbage that would have you believe you're ignorant for investing in help.
The professional financial advisor that you do invest in for help should be someone you trust, should communicate with you frequently, should provide education and insight, and should charge fees that are fair and reasonable based upon the services they provide for you. If you pay an advisor 1% of your assets and it saves you more than 1% due to the prevention of ridiculous behavior, you're better off!
Even as an experienced and credentialed financial advisor, I still can't successfully manage my own money. I make too many emotional mistakes. We all do. None of us are immune from the emotions that are tied to our personal goals and dreams for our families and our lives.
The job of a financial advisor is to save you from yourself. His or her job is to help remove that emotion from your decision-making process. The best financial advisors are much more than money managers, they are life counselors and coaches.
So I ask you? Which cost is greater? Investment advisor fees or your bad investment decisions?
p.s. Ironically, the MarketRiders Blog does not allow for comments…